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"Spain on Saturday agreed to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion (or €100)." Note: this is for the banks only…not for Spain, itself… The IMF had suggested that the minimum needed to stop the drain at Spanish banks was around $46 billion. So, for once, it seems as if the finance ministers are finally trying to get their arms around the problem and not just "kick the can down the road".

After what we have seen over the last three years of so, it is easy to be skeptical. To raise the credibility of the officials in the eurozone, this effort is going to have to be followed up by something more. Yes, the agreement has not really been signed and sealed yet, and I am looking further down the road.

That, however, is the only way that credibility is going to become established. One still shudders at the lack of leadership that exists within this community. But, the next steps must be taken, and they are going to have to follow right on the heels of this effort to halt the decline of the Spanish banking system.

The next steps are going to have to strongly indicate that the eurozone is following up this action with a real effort to create a European Banking Union! This will not be a simple task, by any means, but it is the next thing on the agenda. Europe needs a new unified fiscal authority to keep the eurozone together and to stabilize the euro. This will be an even greater task than the building the European Banking Union.

The banking system needs to be saved first and this must be done in the short run. The fear of a run on European banks seems real and this fear must be dealt with before we get to the sovereign debt issue. Thus, full attention must be given to the issue of a banking union for it is the short run issue of consequence right now!

A major issue that will overshadow much of the debates relating to the creation of a European Banking Union is giving up the sovereignty over banks that now reside within national jurisdiction. That is, each individual nation in the eurozone is going to have to give up something very dear to them in order to achieve the creation of a banking union. This surrender involves centuries of history, pain, dislike-- and in some cases, outright hatred. Can the officials get over this hang-up? Can they put the past behind them in order to save the future?

Creating a banking union, however, is just the start. If there are national issues that must be given up in creating a "federal" banking union, these issues pale when one considers what these nations must give up to create a "federal" government that oversees and controls the spending and taxing and so forth that have formerly been completely under the control and oversight of the individual nations themselves.

But, it seems to me that there is very little to choose from in the present situation. Let's consider three possible outcomes from the current state. First, a European Banking Union is formed followed by the formation of a federal European government that oversees and controls spending for the eurozone. Second, the eurozone falls apart and the individual nations now making up the union go on their merry way. Third, some nations form a banking union and a federal government and other drop out of the community.

To me, the suffering and pain that would accompany the second and third choices would be very substantial. The second and third options are just not pretty! But, human beings can be very self-destructive at times and make choices that are stupid and against their own best interests. In my mind, there is no real choice. Somehow, someway, European officials are going to have to form a European Banking Union and are then going to have to follow this up with some kind of federal government that deals with the combined fiscal issues of the eurozone. Therefore, I am pleased to see the discussions concerning the rescue of the Spanish banks going forward. I am hopeful that these discussions will be followed up by the formation of a European Banking Union.

Then, the big task…a federal European government that will discharge the responsibilities of the eurozone with respect to the fiscal affairs of the community. Of course, this federal government will also have to deal with the restructuring of economies, work-rules, pensions, and so forth. I believe that seeing real, credible movement on the part of European officials will be viewed positively by international investors. If these investors react positively to the movements to create a European Banking Union and then to the further efforts to create a federal European government, I believe that financial markets will rise and this will provide the support and encouragement for the project to continue.

If this process gets started the European officials must not let the momentum stop, or the international investment community will lose heart and argue that the officials were not fully into the idea in the first place. Skepticism will set in again. I see the possibility of getting started on the European Banking Union as a real opportunity. The issues here are not as great as those connected with the formation of a federal European government. So, this is a chance to start on issues that are smaller and are clearer. The important thing is to get the process jump-started and then build on the momentum.

Disclosure: No positions

Source: Spain: Is This The Start Of Something Big?